Why the RBI is likely to wait to do a rate cut.

The News

Last Friday, the RBI Governor Shaktikanta Das said that cutting the interest rate at this juncture could be ‘very premature’ and ‘risky’.

For context, the U.S. Central Bank cut interest rates last month, easing loans to push economic growth. Central banks globally are following a ‘rate-cut’ trend to boost their economies. In 2024, there have been 130 rate cuts worldwide, compared to 84 in 2023.

Addressing this, the RBI Governor said, “We don’t want to join any party… and if we decide to join the party, we would like to join it on a durable basis.”

So it’s clear that the RBI is likely to delay the rate cut. The reason? Well, the inflation.

You see, when RBI lowers interest rates, borrowing becomes cheaper, encouraging people and businesses to take out loans and spend more—on homes, cars, or business expansion. With the ease of borrowing, overall demand increases, leading to higher prices.

Lower interest rates = more borrowing and spending = higher demand = higher prices (i.e. inflation). Economics 101.

So the key is inflation here. It is one of the major determinants of interest rates.

What the latest inflation numbers suggest?

India’s overall inflation rose to a nine-month high in September to 5.49% from 3.65% in August.

I’m sure you would have witnessed increased vegetable prices lately, as food inflation rose to 9.24% in September, compared to 5.66% in August.

Clearly, inflation is on the higher side. Low interest rates with already high inflation mean even higher inflation.

For many, inflation might seem like a distant worry, but for those at the bottom of the income pyramid, it’s a daily struggle that hits hardest.

To tame the higher inflation, RBI would have to increase interest rates, discouraging people from taking loans to reduce the overall demand and inflation.

Remember the words of the RBI Governor? He said that if we do the rate cut now, it won’t be durable because soon inflation would go out of control and it would force us to increase interest rates.

Rather, leave the interest rate where it is and wait for inflation numbers to improve. Makes more sense, right? That’s what the RBI has done this time.

To conclude

While the world might be on a rate-cut spree, the RBI’s cautious stance highlights the importance of stability and long-term economic health over short-term growth bursts.